Muthoot Finance IPO- Right Price, Right Opportunity, Right Time

Muthoot finance Limited is Non-Banking Finance Company, headquarters in Southern India state of Kerala. MFL is a subsidiary of Muthoot Capital Service Ltd.

MFL provide personal and business loan secured by gold jewellery or gold loans to individuals particularly to whom loans are not available at all. Muthoot Group is into diversified business which includes hospitality, health care, media, education, information technology, foreign exchange, insurance distribution and money transfer service. The company also operates three windmills in the state of Tamil Nadu but the same forms a very small segment, about 0.23% of the total revenue.

About Gold financing

Gold Finance is a personal and business loan secured by gold jewellery, or gold loans to the the individuals who have the jewellery but unable to access loans in short period. There are several schemes varying from company to company. Gold Loan market is the fastest growing loan finance market. The market grew 46% CAGR over FY07-10 driven by expansion. Gold loan market is expected to rise at 40% over the next three years, based on competitive landscape and changes in the trends. It is also expected that the gold loan market will welcome enough opportunities for portfolio diversification and expansion and can yield huge margins to NBFC. Among loan product basket lending against gold is the most favourable retail loan product. Du-point analysis reveals that gold finance business generated – 4% ROA in the past five years in India. It is believed that gold finance sector continues to rise and yield good margins.

Key highlights

Muthoot finance limited is the largest gold financing company in India in terms of loan portfolio. As on march 2010 Gold Loan portfolio comprised approx 2.8 million loan accounts in India. The company is also expecting to grow the gold loan book by another Rs.10000 cr in the next one year. Muthoot finance enjoys a 20% market share in the Rs.65000 cr organised gold market.

MFL has huge branch presence with 2611 branches across, except northeast. MPL is planning to set up at northeast after the IPO.

In financials, MFL has had an average return on net worth (RONW) of 39% which is far better than its competitor Manappuram having only 19.61%. MFL have higher scale in terms of gold loan portfolio of Rs.128.9 billion as compared to its peer Manappuram General Finance with 1800 branches and gold loan portfolio of 65 billion. Its assets under management (AUM) increased to Rs.74.38 billion as on March 31, 2010 from Rs.33.69 billion as on march 31, 2009. Net profit of the company is continuously rising and it has clear plans of branch expansion and improvement in the branch productivity. Net profit in FY08 was 63.1 crore which has increased to 291.5 crore in FY11.

Key Financials

Rs in crore

FY08

FY09

FY10

8MFY11

Net Interest income

178.1

296.5

603.7

706.8

PPP

97.7

148.9

347.7

442.4

Net Profit

63.1

97.9

228.5

291.5

Risk factors

Recently RBI circular have removed gold-loan from agricultural loan priority sector category. The removal of this priority sector benefit will marginally diminish the attractiveness of bank lending to this sector. The main impact of this regulatory change is that the borrowing cost of the gold loan player’s will adversely impact the Net interest margin and portfolio growth of the company. Apart from this, some of the bank had already entered into gold finance in recent past years. This competition can hamper the profit margin and return ratio.

One factor which is not consistent internally is that MFL pays higher compensation to the director. In 2010 it was Rs 192 million, which amounts to 8.4% of the net profit. It is far higher than peer company Manappuram General Finance pays 900,000 rupees , or 0.08% of its net profit as director’s compensation

IPO grading

The IPO has been graded by CRISIL Limited and ICRA limited. Muthoot Finance Limited has been assigned IPO GRADE 4/5 in their letters dated March 09, 2011 and March 07, 2011 respectively. According to the scale determined it indicates that the Issue are above average.

Overall view

It is advisable for the investor to subscribe the IPO of Muthoot Finance Limited keeping in mind its medium term benefits and reasonable price price ban fixed by the company. The credit rating assigned by CRISIL and ICRA is also above average which indicates the strong fundamentals of the company. Despite some regulatory issue it is advisable because reasonable price and industry growth balances the chart.